car_guy

Chrysler: Reshuffle the Corporate Capital Structure?

Many of Chrysler's plants are brand new and loaded with advanced automation technology. GM/Ford/Chrysler plants tend to have higher levels of advanced automation because they are compensating for much higher labor rates. In the '80s and '90s the US 3 were closing very old outdated plants that nobody wanted. The remaining plants have modern layouts and it would be much cheaper to buy one of these than to spend $1-2B building a new one. Also, Honda has multiple plants in heavily union Ohio and has had them there for over 30 years.

That said, these plants still have very little value because of the overcapacity that exists, especially in a 10-13M vehicle market (down from 16 in 2007). Also, the only plants built by the import OEMs in the last 10-15 years have been truck plants to support that uniquely US vehicle the SUV. With the SUV dying or dead, the existing plants will likely be converted to build other vehicles, but there is no reason to build a new plant. I doubt there will be a new auto assembly plant built in the US for next 10-20 years if not longer. Remember, Toyota has a brand new plant sitting empty with no plans to fill it.


On May 03 12:22 PM PastTense wrote:

> I don't agree.
>
> 32% debt recovery in cash is better than 100% of nothing. Lots of
> us think that Chrysler is going to fail shortly and I see it as having
> negligible liquidation value: What would auto companies buy? The
> distribution network and brands are probably salable (I think the
> Chinese might be interested). But who would want the factories? Any
> auto company would prefer to build a high-tech automated factory
> in a non-union state. And since manufacturing is moving overseas
> anyway I don't see much demand from other industries who would have
> to spend a fortune to refurbish the sites. I suppose Chrysler has
> some general real estate which is salable. But the manufacturing
> equipment is so specialized it probably has little more than scrap
> value.
>
> And the whole bankruptcy process bleeds value--so much of the money
> goes to lawyers...
>
> As far as the federal government note the government is paid not
> only returns from the company (which as stated are very poor)--but
> also the government collects taxes and avoids paying benefits to
> laid-off workers and retirees (underfunded pension plans). So I think
> the risk is worth taking for the government.
>
> As to the UAW, I think it will decide to kill the goose who lays
> the golden egg (via greedy collective bargaining demands)--so will
> end up with nothing.

Chrysler: Reshuffle the Corporate Capital Structure?

You have a number of items incorrect, but you do make some interesting points.

First, Fiat is not "paying" $2B for 20% of Chrysler. Fiat is receiving their equity stake for specific commitments to share technology, distribution network, and to make specific investments to build product in the US. Fiat estimates it will spend $2-3B, however, Chrysler estimates that it will save $8-10B it would have to spend to develop the same technology. This is one of the many things the Cerberus bankers learned about the Auto industry AFTER they bought the company from Daimler. Chrysler will replace all of their mid-size & small cars & trucks (B, C, D platforms) with models based on Fiat designs and produce new very small cars (A platform) from Fiat designs & engines. Chrysler must have these platforms & engines to meet new US CAFE standards, even if gas stays cheap for the long term. Daimler would have provided this technology with the DCX model. With Cerberus Chrysler tried to farm it out to partners (Chery, Nissan, etc) and was unsuccessful (only Nissan came to fruition and the strong Yen broke that model). Chrysler's only options were outright aquisition, which the credit crisis made impossible, or a Renault/Nissan style alliance which is what they accomplish w/Fiat.
The terms for Fiat earning the additional 15% are defined in the press release and are the result of specific milestone achievement (build 40mpg car in US, build new small engine for Chrysler in US, sell Chrysler vehicles w/global network). Tooling plants to produce the car & engine will require cash from Fiat, at least $1-2B. What Fiat gets from Chrysler is hardly mutual. Aside from the US sales distribution network, which is really cost avoidance on their part, they get access to Chrysler's new V6 engine and SUV platforms which are helpful, but not mission critical. Chrysler can't survive w/o Fiat because they can't meet the 2020 CAFE standards without the $8-10B investment even if gas stays cheap in the long run. Fiat wants the Chrysler alliance because Marchione believes that a global Auto OEM will need to produce over 5 million vehicles/year to survive in the future. While this is logical, only Toyota, GM, VW, Ford, and Renault/Nissan achieved this goal in 2007 which would provide Fiat with plenty of partners if this theory becomes more real.
Cerberus gets to keep Chrysler Financial (which they admit they ran into the ground in WSJ) and Chrysler Real Estate which has value, but how much is not clear. Cerberus is also using Chrysler to be GMAC's (not GMCC) captive Auto OEM since, due to more brilliance on their part, GMAC is no longer tied to GM and suddenly needs to compete for business. They don't walk away empty handed, but this obviously was not the ending they intended. I agree, no tears for them.
The US taxpayer gets 8% (Canadian get 2%) for their initial $4.5B loan ($1B from Canada). The return is more like 20%. The DIP funding and approx $11B to get out of C11 will be loans that will have to be repaid.
The UAW is not really getting 55%. Classifying them as an unsecured debtor may be legally accurate, but is not an accurate description of the liability they hold for Chrysler. When Cerberus bought their 80.1% of Chrysler from Daimler, they took on $18B of health care liability. The UAW took over this liability for approx 0.70/$1 when the VEBA was created in 2007. The $10B was the remaining cash owed to the VEBA to fund the $18B liability. Counting the approx $2.5B in cash already deposited into the VEBA, the UAW's liability is around $15.5B so using your numbers they recover approx 30%. Same as the bond holders, but they can't simply write off their losses. The UAW is still on the hook for the health care costs and is going to be struggling with this for years to come.
You are right on the money with your assessment of how this situation was impacted by CDS. Based on their actions, it is reasonable to assume the hold outs were fully hedged and drove the C11 to cash out their positions. This is no different than buying a building and burning it down for the insurance money. You would think that the companies issuing the CDS would be smart enough to protect against this behavior or at least void the claim. You propose that the hedged owner transfers their voting rights to the insurer, which makes sense. I propose that a simpler solution is to simply call this what it is, insurance fraud, and prosecute accordingly.

Chrysler's Rebadging Plan: Strategic Blunder for Nissan?

Leave it to Seeking Alpha to publish incorrect, old, news and then build an entire thesis off of it. The article in WSJ has been formally rejected by Chrysler and their partner strategy has been outlined in an article in today's WSJ. From the article: "Mr. LaSorda pledged that every joint venture will either produce an entirely new vehicle not already in Chrysler's lineup or it will be limited to a slightly modified car or truck made or designed by the partner but that doesn't compete with an existing Chrysler model in the same market."

This is consistent with the announced deals with Nissan and Chery. Both deals provide Chrysler with slightly modified vehicles (rebadged) that do not compete with existing models. Nissan would provide B class vehicles based on the Versa , for Latin America and Chery would provide A or B class vehicles for North America. Chrysler has nothing this small and rebadging a partners vehicle is much faster than building your own from scratch. Designing a new vehicle off of an existing platform is quicker and more reliable than designing everything from scratch (which is why every Auto OEM in world takes this approach). Chrysler will ultimately develop a B class vehicle for sale in growing foreign markets and will replace the rebadged vehicles at that time.

Chrysler is already designing the replacement vehicles for the mid-sized C/D segment. This is the highest priority project at the company. However, as the chart above shows, they missed horribly with the latest version of the Sebring/Avenger. The previous versions were more competitive and the new management is focused on doing their homework and hitting the market correctly, like GM did with the Chevy Malibu.

Which is exactly what everyone claims they should do....

Guess they are damned if they do, damned if they don't.